Is the Treasury Wine Estates share price in the buy zone?

The Treasury Wine Estates Ltd (ASX: TWE) share price has risen 4% to $15.40 in 2019. The main catalyst for the rise was an earnings update which revealed that the company is performing well across all operating regions and its first-half result for FY19 will be above the consensus estimate. Treasury Wine Estates expects first half FY19 EBITS (earnings before interest, tax and sgara (self-generating and regenerating assets)) to fall within the range of $335 million to $340 million, beating the consensus forecast of $332 million. At the midpoint of guidance, this would represent a 19% increase over the prior…

The main catalyst for the rise was an earnings update which revealed that the company is performing well across all operating regions and its first-half result for FY19 will be above the consensus estimate.

Treasury Wine Estates expects first half FY19 EBITS (earnings before interest, tax and sgara (self-generating and regenerating assets)) to fall within the range of $335 million to $340 million, beating the consensus forecast of $332 million.

At the midpoint of guidance, this would represent a 19% increase over the prior corresponding period where the company reported EBITS of $283 million.

Growth reaffirmed

Treasury Wine Estates has delivered 25% compounded annual EBITS growth over the last 4 years and the company has reaffirmed its forecast of approximately 25% reported EBITS growth for FY19.

Investors should note that based on the company’s own figures, it expects a 32% increase in second half EBITS over the prior corresponding period in order to reach FY19 EBITS of around $663 million.

Premiumisation strategy

Treasury Wine Estates has successfully embarked on a premiumisation strategy by shifting more of its sales mix towards the higher margin Luxury ($20+ wines) and Masstige ($10-$20 wines) segments of the market and away from the lower margin Commercial ($5-$10 wines) segment. This was particularly evident in FY18 when net sales revenue per case climbed 6.5% to $70.25 and EBITS margin rose 280 basis points to 21.8%.

One of the key drivers of the company’s growth has been the fast-growing Asian economies. In FY18, Asia became Treasury Wine Estates most profitable region with net sales surging 38.9% to $547.6 million and EBITS increasing 36.7% to $205.2 million.

Asia has become the company’s most profitable region due to its superior sales mix and the 37.5% EBITS margin it delivered in FY18. This margin is significantly higher than the 22.7% and 20.1% EBITS margins that were generated in the more mature and higher revenue markets of Australia and New Zealand, and the Americas.

Foolish takeaway

At current prices, Treasury Wine Estates is trading for around 24 times FY19 earnings and around 20 times FY20 earnings. While this is not conventionally cheap, it does represent reasonable value for a long-term buy and hold investor if the company can continue to grow earnings at a high rate as it has done over the last couple of years.

A number of analysts have also become increasingly bullish on Treasury Wine Estates’ prospects following this month’s earnings update with the average price target per The Wall Street Journal currently standing at $17.48.

With many stocks at the larger end of the Australian share market struggling to generate material earnings growth, Treasury Wine Estates remains one of the more promising large-cap growth stocks alongside Aristocrat Leisure Limited(ASX: ALL) and CSL Limited(ASX: CSL) for investors attempting to achieve returns higher than the benchmark index.

Each one pays a fully franked dividend. The names of these Top 3 ASX Blue Chips are included in this specially prepared free report. But you will have to hurry. Depending on demand – and how quickly the share prices of these companies moves – we may be forced to remove this report.

Motley Fool contributor Tim Katavic owns shares of Aristocrat Leisure Limited and CSL Limited. The Motley Fool Australia owns shares of and has recommended Treasury Wine Estates Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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